Does Disinvestment Improve Financial Performance? A Case of Bharat Heavy Electricals Ltd.

Dr. Himanshu Joshi Asst. Professor in Finance NIILM- Center for Management Studies New Delhi. Abstract The basic difference between private and public ownership is the difference in objectives, viz; welfare maximization by the public sector and profit maximization by the private sector. Therefore, there are good reasons for the thinking that the ownership of a firm will have significant effects on its behaviour and performance of an enterprise. Present study is an attempt to analyze the impact of change in the ownership on financial performance of public sector enterprises in general and Bharat Heavy Electricals Limited in particular. In this study, disinvestment of the government shareholding has been taken as an event and pre - disinvestment mean value of various financial parameters for financial years (1986-91) is compared with postdisinvestment mean value of financial years (1992-2000). Our result shows that disinvestment improves the profitability and liquidity position of BHEL while it has affected the dividend payout negatively.


and iron and steel in another study. Bhaya concluded that barring the burden of the fixed capital over which the public sector management has no control and despite higher wages and administered prices over which the management has no control. electricity. The paper is further organized as follows. Bhaya (1990) based his findings on the time series data from 1981-82 to 1985-86 published annually for the public and private sector by the survey of industries. 2 . INTRODUCTION Strategies are formulated in the light of objectives. LITERATURE REVIEW Joshi and Little (1994) have attempted to estimate the real rates of return to investment in the public and private sectors. they claim are primarily in the public sector while the first two are owned predominantly by private interests. drugs and chemicals and consumer goods. aluminum. The authors have no evidence of allocative inefficiencies in general and each of them is relatively as efficient as one another. cotton textiles.Douglas production function to study productive efficiency (or Economic efficiency). An important aspect in the management of public sector enterprises is the relevance of the strategic financial planning technique in dealing with conflicting objectives. He used three indicators of efficiency (managerial efficiency – things that can be controlled by managers). Jha and Sahni (1992) use Annual Survey of Industries data for the years 1960-61 to 1982-83 for our industries: cement. The latter two industries. workforce and material.. Section 3 facilitates discussion on research methodology. 2. Sharma and Sinha (1995) have used Cobb. fertilizers. In the case of public ownership. Thus the purpose of the present study is to analyze the impact of change in the ownership (reduction in government’s ownership) on various financial parameters of a public sector company. which combines both technical and allocative efficiencies for the cement industry in India. the management of firms can be regarded as agents acting for the government to which they are responsible. efficiency in public sector is in no way inferior to the private sector. As compared to private ownership. (c) There is no direct equivalent of the bankruptcy constraint on financial performance. viz. Section 2 reviews the literature related to the topic. (b) There are no marketable ordinary shares in the firm. steel. engineering.1. and therefore play an important role in their accomplishment.Section 4 also justifies the selection of BHEL for the present study with the help of SWOT Analysis and its strategic analysis. On the basis of the evidence available over the period 1981-82 and 1985-86. Objectives of public sector enterprises are conflicting because majority shareholder is the government. Majumdar (1995) evaluated relative performance difference between the government owned. Kaur (1998) compared TFPI of 15 public and 15 private enterprises from diverse sectors. differences between managers and their immediate principals in public ownership arise from following facts: (a) Principals do not typically seek to maximize profits. joint sector and private sectors of Indian industry. and hence no market for corporate control. The background of BHEL is given in section 4. Hypotheses are tested and results are presented in section 5 while section 6 gives conclusion. They are money.

disinvestment mean value of various financial parameters for Financial Years (1986-91) is compared with their Post disinvestment Mean value for Financial Years (1992-2000) Research Hypothesis In the present study it has been assumed that due to maintaining accordance with government’s Economic. Public Sector Company operating in highly competitive environment. For the purpose of the present study Pre. attributing any observed change to the disinvestment. In this approach performance of the enterprise before disinvestment is compared with its performance after disinvestment. Social. The results indicated that both public and private firms experienced modest positive average annual growth rate during this period. Also recovery of short term and 3 . Thus for the present study case study method has been taken. For measuring proportion of debt in capital structure we have computed mean value of Debt to Asset Ratio for before and after disinvestment period. RESEARCH METHODOLOGY The methodology of research is based upon case study method.2000. it is expected: (H1) That the dilution of government equity in ownership will cause profitability and operating efficiency to improve. PAYOUTA > PAYOUTB (H4) That the liquidity will improve. multi division. LEVA < LEVB (H3) That dividend payout will increase on disinvestments as private investors would demand higher dividends. Thus this study also revealed that at the enterprise level there is little empirical justification for general presumption in favour of either type of ownership and a case by case examination may be more revealing. Hypothesis: After Disinvestments of BHEL. ROSA > ROSB (H2) There will be decrease in the proportion of debt in the capital structure both because of the state’s withdrawal of debt guarantees and increase in enterprises cost of borrowing. It is expected that sales volume will improve after disinvestment and that will result into higher inventory. It is the method of study in depth rather than breadth. The present study is a case of Bharat Heavy Electricals Limited (BHEL). for measuring the impact of dilution of government equity on dividends we have computed mean value of Dividend Payout Ratio for before and after disinvestment. For measuring profitability we have computed mean value of Return on Sales Ratio before and after disinvestment period. which is a multi product. It was thus expected that disinvestment would lead to increase in public enterprises profitability and increase in operating efficiency.Naib (2002) compared efficiency of 26 enterprises (13 public and 13 private) for a 12 year period from 1988-89 to 1999. 3. Fiscal and Political expectations the public sector enterprises are not able to accomplish their internal financial goals.

(4) BACKGROUND OF BHEL Bharat Heavy Electricals Limited. BHEL has a good system of undertaking modernization of its major products and thus reducing costs.long terms loans and credit allowed to customers (mainly State Electricity Boards whose financial health is poor) will also get improved after dilution in the government equity. B. Since there is no further dilution in the government equity after F.Various financial ratios calculated Pre and Post disinvestment for measuring the financial performance of BHEL are as follows: (i) to measure profitability position. LQTDYA > LQDTYB Data and Variables For the purpose of the present study Pre.Y 1999-2000 we have not taken into consideration the data after that duration. It is generally believed that in the state owned enterprises neither incentives nor sanctions are closely related to performance. It is a multi product. SWOT (Strength. Hyderabad. with three plants at Haridwar. Debt to Assets (Debt/ Total Assets). (iii) to measure liquidity. which may be poorly defined and hard to quantify. Dividend Pay Out Ratio (Dividend Paid/ PAT). (ii) To measure leverage position. SWOT analysis of BHEL clearly depicts that BHEL is functioning in globally competitive environment and there is not level playing field available to it because of its very nature of being a public sector company. Thus we assume here that if we dilute the government ownership in BHEL through disinvestment it will provide level playing filed to it and all round performance of BHEL will improve. Further objectives of PSEs are likely to induce certain social obligations. The resulting looseness of the objectives makes monitoring of the PSEs much difficult. Public Sector Company. Its major competitors are MNCs like Siemens and ABB. It has a sound institutional system of analyzing environment. For the measurement of liquidity we have computed Current Asset to Current Liability Ratio for before and after disinvestment period. Weaknesses. Current Assets to Current Liability Ratio (Current Assets/ Current Liabilities) and (iv) to measure dividend payout. multi division. Most employees have job security and get advancement within a well-defined promotional hierarchy. Prices of BHEL’s products are not fixed like that of consumer goods.L is a market leader in power and industrial products that it manufactures. and Trichy. (BHEL) was set up in November 1964. Opportunities and Threats) analysis of BHEL: Strengths:  Sound engineering base and ability to assimilate  Relatively stable industrial relationship  Access to contemporary technologies with the support from renowned collaborators. Following SWOT analysis of BHEL justify its selection for the purpose of present study.E. 4 . Profit before Depreciation.disinvestment mean value of various financial parameters for Financial Years (1986-91) is compared with their Post disinvestment Mean value for Financial Years (1992-2000). Interest and Taxes to Sales Ratio (PBDIT/ Sales) and Profit after Tax to Sales Ratio(PAT/ Sales).H. It is one of the Navaratna PSEs.

Internal inefficiencies in bureaucratic activity. 2. Private goals that lead to budget growth and employment growth. Displacement of social objectives by political objectives.  Inability to provide supplier’s credit.  Ageing power plants would give rise to more spares and services business. For non. Opportunities:  Demand for power and hence plant equipment is expected to grow.BHEL products. 3. Weaknesses:  Difficulty in keeping up the commitments on the product delivery and desired sequence of supplies.  Easy processing of joint ventures/ collaboration/import/ acquisition of new technology.  Lack of effective marketing infrastructure.  Private sector power plants to offer expanded market as utilities suffers resource crunch. which may lead to redundant costs and also rising costs. Ability to successfully overhaul and renovate power stations equipment of different international companies. Low labour for manufacture of entire equipment is available with the company.  Financial and operational autonomy for profit making public sector enterprises. Largest source of domestic business leading to major presence and influence in the market. price charged are very high. Low debt equity ratio (even lower than 0. liquidity position of BHEL is not satisfactory.  Being a public sector company BHEL is suffering from sub optimality of control due to: 1. services and spares are not easily available and if they are. Direct political intervention in managerial decision over an arm length relationship that would restrict government’s task of setting appropriate managerial incentive structure. which are the major customers of BHEL in India. To make the public sector more efficient government has decided to grant enhanced autonomy and delegation of powers to the profit making public sector enterprises. 5 . Threats:  Increased competition both national and international. 4.  Export opportunities. Ability to manufacture or procure to supply spares.  Due to poor financial position of state electricity boards. complete know.  Larger delivery cycles in comparison with international suppliers of similar equipment.5:1) for all the years under study. soft loans and financing of power projects. Fully equipped to take capital maintenance and servicing of the power plants. Sound financial position in terms of profitability and solvency.  Life expansion program for old power stations.         Ability to set up power plants on turnkey basis. enabling company to raise capital.

Bs. Thus we assume here that dilution of 6 .5 15 Projected Market Growth 35 1 35 Technological Requirement 15 0. so future power projects would be opened up in private sector. STRATEGIC ANALYSIS OF BHEL A business’s position within the planning grid is calculated by subjectively quantifying the two dimensions of the grid. Company is performing fairly well on production efficiency and R&D front.5 Political and Regulatory factors 20 0 0 Total 100 ----57.0. Low = 0.0 Business Strength for BHEL Business Strength Factors Weight Relative Market Share 30 Ownership 20 Production Capacity 5 Production Efficiency 5 R&D 10 Strategic Capability 10 Marketing 10 Finance 10 Total 100 Ratings: High = 1.5 0. Industry attractiveness factors for BHEL Industry Attractiveness factors Weight Ratings Score Market Size 30 0. Its ownership structure also sometime restrain it form cheap foreign financing and cross border joint ventures.5 7.   Multilateral agencies reluctant to lend to power sector because of poor financial management of S. It is market leader in PPE and other related industries.5 5 10 0 10 62. There is enough production capacity available with BHEL and scope of its expansion is also very good. Medium = 0. Low = 0 Ratings 1 0 1 0.5 Power Plant Equipment (PPE) and others various related industries in which BHEL operates seems to be fairly attractive for it. Finance and Strategic capability of BHEL is outstanding. Being a public sector company it does not put much effort on the marketing. As far as overall business strength is concerned it is in favour of BHEL.5.5 Ratings: High = 1. foreign companies spending much more on business promotion tactics. Only areas of concern for the company are its ownership and marketing.0.Bs More concessions to private sector and not to government owned utilities like NTPC or S.5.E. Level playing ground not available. Medium = 0. Majority of its client are financially sick State Electricity Boards (SEBs) and BHEL is a preferred supplier to these SEBs because its competitor MNCs are hesitant to supply equipments to these SEBs because of their sick financial position.5 1 0 1 -----Score 30 0 5 2.E. which may result into expanded international market for its products.

446 1.063 0.225 1.590 0.462 Predisinvestment Period (19861991) 0.268 0.1216 0.211 Post disinvestment Period (19922000) Dividend Payout Ratio (Div/ PAT) before and after disinvestment: 0.052 0.1566 0.the government ownership in BHEL.321 0.378 0.531 1.078 Post disinvestment Period (19922000) Leverage (Debt/ Asset) before and after disinvestment: 0.430 0.306 0.116 0.085 0.429 1.122 0.318 1.417 0. 5.400 0.140 0.1323 0.260 0.316 1. RESULT ANALYSIS Profitability (PBDIT/Sales) before and after disinvestment: 0.170 0.186 0.161 0. which is a globally competitive company functioning in fairly attractive industry.235 Post disinvestment Period (19922000) Liquidity (Current Asset to Current liability Ratio) before and after disinvestment: 1.276 0.1548 Predisinvestment Period (19861991) 0.474 1.309 0.187 0.220 0.474 1.1552 0.364 Predisinvestment Period (19861991) 0.355 1.157 0.132 1.163 0.170 1.474 1.130 0.387 Predisinvestment Period (19861991) 1.112 0.298 0.820 Post disinvestment Period (19922000) 7 . would result into improved overall performance.548 0.455 0.501 0.463 0.180 0.

Mean of Return on Sales Ratio for post disinvestment period is significantly higher than the same ratio for pre disinvestment period. Reason for this improvement in liquidity can be allocated to its huge investment in inventories after disinvestment. which is in accordance with our hypothesis.154) + 0.180 1.(0. Dividend Payout Ratio: Hypothesis: PAYOUTA > PAYOUTB Hypothesis is rejected as PAYOUTA – PAYOUTB = (-0. however it was expected that private investors would demand more dividends.1640 0. which resulted into more retained earning and higher growth rate. Reason behind this decline is expansion opportunities available to BHEL. which shows an increase in cost of debt after dilution of government equity. that is again in accordance with our hypothesis.0191 Profitability after disinvestment has been increased.146) . Liquidity: Hypothesis: LQTDYA > LQDTYB Hypothesis is accepted as LQTDYA . as its sales volume has also increased significantly.234 Liquidity of BHEL has been improved after disinvestment.1449 Return on sales (ROS) Leverage 0.480 Differenc Hypothesis e Accepted/ Rejected (Post – Pre) + 0.146) Leverage after disinvestment has been reduced.0191 .234 Accepted Accepted Rejected Accepted Profitability: Hypothesis: ROSA > ROSB Hypothesis is accepted as ROSA – ROSB = + 0. which can be observed from the increased market capitalization of BHEL after Disinvestment.334 Payout Ratio Liquidity 1. Leverage: Hypothesis: LEVA > LEVB Hypothesis is accepted as LEVA .154) Dividend Payout Ratio of BHEL has been reduced after disinvestment.LQDTYB = + 0.307 0. 8 .Test of Hypothesis: Performance Pre Variable disinvestment Mean Value of FY (1986 91) Profitability 0.246 Post Disinvestment Mean Value of FY (19922000) 0. Debt –Equity Ratio for post disinvestment period is significantly lower than the same ratio for pre disinvestment period.453 Dividend 0.LEVB = (-0.(0.

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